The Blame Game

The analysts on Wall Street sure are taking their lumps. They should have known tech stocks were going to collapse--and said so, wail the critics. A little more diligence on their part and maybe fewer folks would have speculated in profitless companies and lost so much money, goes the argument. Phooey. Why not blame analysts for poor retail sales during the holidays too; heck, for the entire economic slowdown? Didn't they cause the bubble that burst and left so many feeling poor? While we're at it, let's blame them for the weather, your weight problem and hanging chads.

Sure, Wall Street let us down. What else is new? No one expected the Fed to cut short-term rates a half-point last week. That done, few figured stocks would be sinking by week's end after a one-day rally and Friday's healthy jobs report. Studies show that when asked whether long-term rates will rise or fall--a fifty-fifty proposition--economists get it right only a third of the time. Market gurus fail at predicting the Dow. Analysts miss more than they hit when forecasting earnings. This is very old stuff. Nostradamus predicted the world would end in 1999. Guess what? The future is unknowable.

If you got trapped with too many expensive tech stocks, take responsibility. Come on. Weren't you being greedy? And now you want to blame Wall Street for staking and touting unproven companies? Seems to me investor demand for such stocks preceded the supply. And let's not forget that the former highflyers were initially priced well below the nosebleed levels that rabid investors sent them to. Indeed, bankers came under criticism in the early days of the bubble for not pricing IPOs high enough.

Wall Street did exactly what it's supposed to do: throw billions of dollars at a big new idea, in this case the Internet. That funding gave everyone with a business plan the ability to test it. Now we're finding out which plans work best. This shakeout was as unavoidable as it is brutal--and the reason high-risk investing is best left to those who can afford to lose. The problem is that people who couldn't afford to lose gambled anyway.

My point is not to defend the analysts. Basing a buy recommendation on the number of website hits is unconscionable, as is forecasting breakneck growth for every company in an industry with no history. Most appalling are those glowing research reports on companies a brokerage has recently taken public or hopes to woo business from in the future.

But a record 49% of Americans own stock. This isn't play money. It's a cop-out to blame analysts if you were so caught up in the money chase that you failed to recognize their tortured logic and conflicts of interest. You owe it to yourself to understand how things work. Earnings expectations, not earnings, are what matter. Mr. Average gets shares of an IPO not because he's lucky, but because the IPO was deemed too chancy for better clients. When analysts say buy, they mean hold; hold, they mean sell.

There's nothing easy about it. So most people should never have had more than 20% of their portfolio in tech. If you had held utilities, food and energy stocks and real estate investment trusts with tech, you'd probably would have made money last year. And that brings me to another street rule: diversification works; it just doesn't work fast.